BRUSSELS — European leaders moved Thursday to meet a German demand for treaty change aimed at avoiding new Greek-style crises as part of the EU's biggest reforms since the 1999 creation of the euro.
Diplomatic sources said leaders were studying a proposal for "limited" or "light" treaty change over a drawn-out late-night dinner.
However, diplomats also warned that British Prime Minister David Cameron was holding out, linking London's backing to a distinct demand to cap the European Union's 2011 budget.
After a climbdown having previously fought for a cash freeze, even the capped increase he now wants will cost Britain, fresh from its fiercest cuts in decades, 435 million pounds (some 500 million euros, 700 million dollars).
The dinner proposal, seen by AFP, invites EU president Herman Van Rompuy to consult with the EU's 27 individual states on a "light" treaty change ahead of fresh talks at a December summit.
The aim is to implement changes by mid-2013, the expiry point for a temporary, three-year fund set up in May to reassure markets fearing contagious side-effects.
Leaders agreed on the "need" to create a permanent emergency fund, but Germany has made its setting up conditional on changing the EU's Lisbon treaty.
The Berlin demand, issued last week with the backing of France, initially triggered outrage but appeared to be gaining support -- on condition the treaty be tweaked rather than massively overhauled.
The hard-fought treaty was a decade in the making and only came into effect last December after failed referendums and tough talks.
Germany fears that its Constitutional Court will block a bid to give perpetual life to the European Financial Stability Fund unless the treaty is changed to spell out that a country can be saved from bankruptcy by its partners. The treaty currently has a "no bail-out" clause.
But some states fear that referendums in places like Austria or Ireland, whose Prime Minister Brian Cowen said it was "too early" to call, could unleash unintended damage.
Already both houses of parliament in London would have to ratify a change.
"Taxpayers should not be the only ones to shoulder the responsibility," Merkel said of the type of perpetual rescue fund taking shape.
She specified she wanted "a mechanism that includes those, the banks and investment funds, that gain money on high interest rates" on loans to countries in difficulty, and underlined: "To do this we need a modification of the treaties."
EU finance ministers already agreed last week to endorse Van Rompuy's "task force" recommendations on improving economic governance, which identify the need for a permanent successor to the EFSF, that has a ceiling of 440 billion euros (currently more than 600 billion dollars).
However, wide-ranging discussions have still to unfold on the changes German Chancellor Angela Merkel insists are required to bring a permanent rescue fund into reality.
Leaders also discussed whether to withdraw voting rights from the worst debt and deficit offenders, another, albeit lesser condition laid down by Merkel, whose government funds the lion's share among states that use the euro.
The agreed innovations include tougher sanctions and stricter surveillance, even if penalties would be less severe than initially imagined.
For the first time, states would have to deposit monies with the EU, with the interest potentially withheld even before governments cross an existing three percent of gross domestic product threshold for annual deficits.
Another development would see sanctions applied to states whose overall, accumulated debt goes beyond 60 percent of GDP and who do not take steps sufficiently quickly to bring the level back down.
Even there, Poland wants costly pension reform in former communist EU states to be taken into account.
Coordinated sharing of national budgets each spring, will already come into force as of 2011, although many of the changes will need to wait.
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